If you run an LLC business and are a non-resident alien, what are your tax responsibilities?
The short answer is: this is a very tricky and complex matter but if you are not based in the US, you MAY NOT have to pay US taxes.
This is just a really round about way of saying that you need to consult a CPA or tax professional for your business. Getting answers off the internet is not good tax advice!
Let's see what our community of experts think about this question:
First off I need to give you a disclaimer that taxation of non-residents by the US is a complex topic. I am going to give you general answers, but you really should contact a US tax professional and discuss all the details and specifics of your unique situation. I am also required to say that nothing I tell you can be used to avoid paying income tax to the US that you are legally obligated to pay.
Now: Generally having a checking account in the US does not subject you to US income tax. You have to look to the nature of the income producing activities. If you are not selling tangible goods and only performing a service and you perform all of that service outside the US, meaning you have no physical presence in the US, you should not have what is known as Effectively Connected Income (ECI) and should not owe US income tax. NOTE: a very small change, such as making a business trip to the US can easily change that.
Owning an LLC in the US is likely going to put you one step closer to having ECI but does not in itself mean you now owe US income tax. If you are the sole owner of the LLC and choose the default tax designation for an LLC which is disregarded entity, then the IRS ignores the existence of the LLC and you continue to look at your income producing activity the same way you did as an individual discussed above.
Again it takes very little to change these circumstances. Adding an additional owner, even another non-resident alien, makes your LLC a partnership and thus subjects all partners to US income tax on profits from carrying on your business in the US.
Finally you are absolutely correct that many people are not aware that in the internet age the US can actually be a great tax haven for US non-resident aliens because of how the US taxes non-resident non-citizens. As long as the non US resident can avoid ECI, and choose carefully where they reside, they can greatly minimize their income tax while still providing services to the US market.
UPDATE as of 2017. For tax years on Dec 31,2017 or after, foreign owned LLC's are now required to file a report with the IRS that discloses transfers of money or other assets between the US LLC and its foreign owner or foreign related parties. So even if you do not have any US tax obligation, you might still have a US tax reporting obligation.
UPDATE as of 2018. Bear with me this is long, but as I have said before tax laws change. Beginning with tax year 2018, the concept of personal exemptions went away and standard deduction amounts increased. This is important because non-US residents qualified for personal exemptions, they do NOT qualify for standard deduction. The way the tax law reads now an individual is required to file a tax return, if they have gross income above the standard deduction amount for their filing status. Since the standard deduction for a non-resident is zero, if a non-resident has $1 of US sourced gross revenue they are required to file a tax return. Remember filing a US tax return does not automatically mean you owe tax, but you do have to file a return. Typically this would be Form 1040NR. Note that the law is currently set to go back to the “old rules” in 2025.Wray Rives
A non-US tax person pays income taxes in the US on so-called passive income coming from US sources. You would have a 30% withholding tax on such income such as interest from a bank account. However, you are a tax resident of Mexico and Mexico has a bilateral tax treaty with the US mitigating the results. This treaty Article 11 paragraph 2 reduces the rate to 10%. I expect this has not been an issue as you did not receive passive income in the US as you did not mention such.
Back to your actual situation, the other taxable area for Non-US tax person comes from operating a United States Trade or Business “(USTB”) in the US. Here, such a person faces full tax on the USTB’s profits at graduated tax rates. A person conducting considerable, continuous and regular business activities in the US could have a USTB as defined by the courts over the years.
Next, we look at your income type: you have so-called foreign source income as you physically provide digital services out of your Mexico location. Service income gets sourced to where you physically perform the service as covered in Section 862(a)(3).
So, we then move back to the USTB issue for the US. We find you do not have a USTB as personal foreign service income does not apply to a USTB as not considered effectively connected with such USTB (Section 864(c)(4)(A)).
So, you have $0 reportable taxable income from a USTB in the US. Your US LLC represents a disregarded entity for tax purposes under Treasury Regulation Section 301.7701-3(b)(1)(ii). The $0 income flow from your LLC to your 1040 NR return. Though, you have no income to report here or return to file.
Even if you had a USTB you may have used the Mexico US Treaty Article 5 for claiming no permanent establishment in the US. A permanent establishment requires a higher US tax presence than a USTB.
So, you apply US tax requirements first and then the treaty second. In this case, the US tax requirements required no income reported in the US so you did not need the treaty provision. As a side note a person taking a treaty positions still has reporting requirements under Section 6114 and Treasury Regulation Section 1.6114-1.
However, you owe taxes in Mexico as you are a tax resident there. You may consider contacting a Mexico Tax Person for guidance on meeting your Mexico Tax requirement though I realize you may have already done such as you were only inquiring about US tax issues here.
Though, your US LLC does file Form 5742 (yearly information form) as noted in Section 6038A and corresponding Treasury Regulation Sections 1.6038A. These are new reporting requirements for 2017. We would file this annual reporting in early 2018 ($10,000 penalty for not filing this annual report).
I based the above analysis on the fact situation given. If the facts change in any fashion, we may have a different outcome.Ross Treeby
So here we see this is an incredibly difficult question to answer. If you're not a US resident and you are not receiving “passive income” you might not have any taxes to pay.
ALWAYS CONSULT A TAX PROFESSIONAL. THIS ARTICLE IS NOT TAX ADVICE.